Saturday, July 25, 2015

Q1’09 was the quarter that had peak debt of the banks.  So I am starting with this quarter to the present Q1’15, six years.  The total leverage in the economy is up by $6,310.3 billion dollars.  That reads six trillion three hundred ten billion dollars.  Here are the components from FRB Z.1 D3.

+1,022.9               Households ex-mortgages
-1,191.3                Households mortagages
+1,552.9               Businesses
+      88.6               State and Local government
+6,241.4               Federal government
-2,996.3                Domestic financial sectors
+1,592.1               Foreign
+6,310.3               TOTAL

The non-financial domestic non-government figure, i.e., households and businesses is 1.384 trillion dollars of increased borrowing.  This is the real economy.  It has borrowed an average of $230.75 billion each year over the last six years.  Doesn’t seem like a lot.  The combined government and banks has increased borrowing by 3.334 trillion dollars.  So it appears on the surface that half of the new Federal debt paid off the bank’s liabilities.   And thank you resident financial institutions for having faith in the US.

What is really interesting is that the efficiency of credit has improved during this period.  “Improved” is an understatement.  But first let’s look at the velocity of money which is simply GDP divided by the money stock.

This shows how terribly inefficient increasing the money supply has been.  And we all have heard over and over again how total debt has been increasing so much faster than GDP.  Scathing criticism is directed to the fact that total debt has gone up 6 trillion dollars and GDP had only gone up 3 trillion dollars.  But since the great recession, something amazing has happened.  Since total debt is $59 + trillion and GDP is $17 + trillion the ratios have stayed almost the same during the period in question.

The velocity of credit (GDP divided by total credit) has stopped going down and has in fact gone up a small amount.  The efficiency of credit has never been better since the great credit expansion that started in the early 1980s.

I will postulate based on the components that deleveraged, household mortgages and banks, having high debt is bad for the economy, and components that have increased in debt, businesses and the Federal government, having high debt is good for the economy.

What?  Wait.  Ok.  Let me think.

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